Why Thomas Cook’s illustrious past was no guarantee of its future
James ChappleA share price crash, mounting debts and a plea for a £200 million bailout – sounds familiar, doesn’t it?
The failure of Thomas Cook on Monday (23 September) was not without a sense of deja vu; Cook came perilously close to collapse in 2011 when it issued three profit warnings in less than 12 months.
The last, in July 2011, sent its share price tumbling 25% to 93p as the Arab Spring drove holidaymakers away from the Middle East and North Africa.
Cook eventually took out a £200 million emergency loan to stave off bankruptcy, aided by a little behind-the-scenes assistance from Number 10.
A refinancing package and strategic review followed in 2012, and the business recovered under the stewardship of new chief executive Harriet Green and later Peter Fankhauser.
Cook’s share prices rose to a high of around £19 in February 2014 and fluctuated between £6-£12 as the market ebbed and flowed over several intervening years.
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From comeback to collapse
Eight years hence, and the likes of Egypt, Turkey, Tunisia and Morocco are bouncing back; indeed, earlier this year, Turkey had recovered to become Cook’s second most popular destination, and Tunisia its seventh.
This time around, it was Cook’s European destinations feeling the squeeze, with Westminster able to offer little by way of certainty on today’s great unknown – Brexit.
The first of two fresh profit warnings came on 24 September 2018, whereby Cook revised its full-year profit forecast down 13% from £323 million to £280 million – citing the impact of the summer heatwave.
A second followed in late November when its full-year earnings came in at £250 million, £30 million lower than its guidance and £58 million lower than earnings achieved during the same period the previous year.
Cook said the group’s UK performance was “particularly disappointing” and vowed to overhaul its UK tour operator.
In February, it announced a “strategic review” of its airline after posting a first-quarter operating loss of £60 million, up from £14 million.
'Throwing good money after bad'
But it was in May that the true extent of Cook’s troubles were laid bare when it revised down the value of assets from its 2007 merger with MyTravel by some £1.1 billion, sending its losses spiralling to a staggering £1.45 billion.
Cook said in July it was in “advanced discussions” with its largest shareholder, Chinese travel giant Fosun, over a £750 million restructure.
The proposal, said Cook at the time, would bring £750 million fresh funding “to provide sufficient liquidity to trade over the winter 2019/20 season” and “the financial flexibility to invest in the business for the future”.
Its debts continued to mount though; that £750 million restructure became a £900 million rescue effort, conditional on £200 million cash headroom for the winter. It proved insurmountable.
A late attempt to revive interest in its northern European business to raise the necessary funds failed, while transport secretary Grant Shapps has since said Cook’s last-ditch plea to government for a £150 million subvention – had it been granted – would have been tantamount to “throwing good money after bad”.
Cook’s illustrious history sadly counted for little come the end when it failed to plan quickly or decisively enough for its future. Saddled with enormous debt, the company’s management was unable to execute change quickly enough to alter Cook’s course, despite a concerted effort in the past two or three years to pivot. As one commenter put it to me, the 2011 bailout was little more than a sticking plaster that left former CEO Harriet Green and latterly Peter Fankhauser “spending their whole time fighting fires”. While Cook’s collapse is a desperately sad development for the travel sector, it is a salutary lesson that no one is too big to fail.
James Chapple
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